Emerson Radio A Value, But Limited Customer List A Risk

Emerson Radio Corp (NYSEMKT:MSN) currently offers Benjamin Graham style net-nets value, a trait that is hard to find in today’s somewhat overstretched market. Emerson recently reported fiscal Q1 2014 results that showed a year-on-year fall in revenue of 46%, however, revenue expanded 7.4% from the previous quarter. Gross income and gross margins fell by around 46% and 100 bps respectively YoY.

Still, Emerson Radio Corp (NYSEMKT:MSN) is on sale and currently, most of the company’s assets can be brought for nothing.

Emerson Radio’s assests

At the end of the last reported quarter, the company had $61.3 million in cash and short term assets. Total current assets totalled $89.4 million while current liabilities came in at $15.5 million, which gives a current ratio of 5.8 and a quick ratio of 5.5, so there are no solvency issues. Moreover, total liabilities only amounted to $15.7 million, so current assets cover total liabilities 5.7 times. Net working capital was $73.9 million, so, at a current market capitalization of $55.6 million, the company is trading below the value of its net working capital and this is still excluding $1.6 million of long-term assets. All in all, the company is extremely cheap.

Unfortunately, the company has made a loss in three out of the past ten years and the last dividend payout was back in 2010. So, the company fails to meet all of Graham’s criteria but on the face of it, Emerson looks to be a risk worth taking.

Having said all of that, aside for the balance sheet, the outlook for Emerson is somewhat cloudy. The company actually relies on three major clients for the majority of its revenue and the loss of any one would pose a threat to the company’s long-term future.

Wal-Mart representing Emerson’s revenue

Wal-Mart Stores, Inc. (NYSE:WMT) represented 45% of Emerson Radio Corp (NYSEMKT:MSN)’s full-year 2013 revenue and Target Corporation (NYSE:TGT) represented 44%. Meanwhile, 80% of Emerson’s licensing revenues came from an agreement with FUNAI ELECTRIC CO.,LTD. (TYO:6839) (OTCMKTS:FUAIY) for the use of the Emerson brand within the U.S. and Canada. Although, these licensing revenues only accounted for 5.3% of full-year 2013 revenue and the agreement with Funai has been extended to March 2015.

The dependence upon these three companies is a risk and one that was brought to light earlier in the fiscal year when Wal-Mart Stores, Inc. (NYSE:WMT) decided to stop stocking two of Emerson microwave ovens. These two products alone accounted for 30% of Emerson’s full-year 2013 revenues.

Emerson sales

Still, despite this dependency on three customers, Emerson should remain profitable over the next few quarters as overall sales are not falling, (they’re not really rising either). That said, the company’s low operational gearing has allowed it to keep profits flowing in, even after sales have collapsed.

It remains to be seen if the company’s stock price will see a significant re-rating, to bring it in line with the value of its assets over the next few months or even years as, for four of the past ten years, the company has traded below book value as growth has eluded the company.

Nonetheless, overall Emerson is currently trading below the value of its net assets and looks like a good value investment for the patient.